DRW’s Don Wilson admits surprise at lack of market volatility
Proprietary trading firm’s head says investors too confident of higher rates in Europe
Don Wilson says his company is “in the business of taking risk”.
DRW, named after his initials, is one of the world’s largest proprietary trading firms. From a base in Chicago it bets its own capital via futures contracts listed on 40 exchanges around the world. As Wall Street banks take fewer risks, companies like the one he founded have filled the vacuum.
There is plenty of risk in the markets DRW plies. President Donald Trump has promised to roll back reforms passed after the financial crisis. Europe has scheduled a series of pivotal elections. While populists fizzled at last week’s Dutch polls, a more important French election is fraying investor nerves.
However, broad measures of implied volatility for equities, bonds and currencies have all notably eased after peaking in the wake of November’s US presidential election.
Mr Wilson, DRW chief executive, says he’s been surprised by the lack of volatility in financial markets since Mr Trump’s unexpected election. “There are many things that could happen that could cause volatility to increase,” he told the FT at a futures industry conference in Boca Raton, Florida last week. “In this environment, being long some wings is probably a good idea,” he added, referring to options that pay out if markets become extremely stressed.
In Europe, he believes markets may be too confident of higher interest rates. He points to uncertainty over the elections and the size of foreign deposits flowing into Switzerland, where rates are negative. “There’s a lot of risk of something misfiring and people becoming more concerned. Yet the markets aren’t really saying that,” he said.
DRW faces turbulence of its own. Mr Wilson is awaiting a judge’s ruling after the US Commodity Futures Trading Commission accused him and his company of “brazen and repeated acts to manipulate” an interest-rate futures market six years ago. Rather than settle with the regulator, Mr Wilson chose to fight the civil charges at trial.
The entire trading industry is nervously following the case, both for its importance in defining what constitutes manipulation and its potential to hobble DRW. The CFTC seeks a permanent trading ban for Mr Wilson and DRW if they’re found liable.
Few trading firms are as influential as DRW, established in 1992 by Mr Wilson, then an options trader on the floor of the Chicago Mercantile Exchange. The company now has 750 employees, two-thirds more than five years ago. By contrast Virtu Financial, a New York peer, has fewer than 150 on the payroll, according to an annual report.
Mr Wilson, aged 49, “is absolutely viewed as a leader in the industry”, said Matt Haraburda, president of XR Trading, a competitor.
DRW is best known for high-frequency trading in fractions of a second. A subsidiary submitted plans to build a radio tower on the English Channel to beam market data between London and Frankfurt. A UK district council, however, rejected the proposal for a structure the height of London’s Shard earlier this year.
As traders invest to shrink data delays from milliseconds to microseconds, “the incremental improvements are constantly smaller”, Mr Wilson said. Some companies have quit, leaving bigger ones such as DRW, Jump Trading and Virtu. “To be the fastest in a pure speed game does require greater resources,” he added.
However, DRW says only a quarter of its business derives from speed trading. It holds some positions open for months, as evidenced by those at issue in the CFTC litigation. Or years: Convexity Properties, a DRW division, develops real estate.
Mr Wilson supports pushing privately negotiated trades, such as interest-rate swaps, on to futures markets where costs are generally cheaper. Unlike a typical proprietary trader he is also an inventor: DRW has licensed its patent on variance swap futures, which track volatility, to Germany’s Eurex exchange, and has created an interest rate contract to be listed by US-based Intercontinental Exchange.
The rise of electronic trading firms has accelerated exchange volumes and offered a sense that markets are liquid, or easy to enter and exit. But increasingly frequent “flash crashes”, when prices collapse for no apparent reason, suggest those traders flee when they are needed most.
Mr Wilson blames shaky liquidity in fixed income markets on the retreat of banks, which once held more bonds in inventory. “If you push risk capital out of the market, then you have to expect greater risk of flash crashes.”
He declined to elaborate on the CFTC case in the interview, but on a panel in Florida he bemoaned what he called “‘gotcha’ regulation” and said government lawyers were “more interested in collecting fines and generating headlines than in making markets better”.
A loss for the CFTC could shatter its theory of market manipulation, while defeat for Mr Wilson could imperil his company. For both sides, it is risky business.